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Does India have a stable demand for money function after reforms? A macroeconometric analysis

Nitin Arora () and OsatiEraghi Asghar ()
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OsatiEraghi Asghar: Islamic Azad University, Arak, Iran; Panjab University, India

Applied Econometrics, 2016, vol. 44, 25-37

Abstract: The present study analyzes the stability of the demand for money function in India over the period 1991:M4–2014:M9 using co-integration and Vector Error Correction Mechanism framework. From analysis, it has been observed that there exists a stable demand for money function in India during the post-reforms period, i.e. a long-run relationship does exist between demand for real balances, national output (Y), rate of interest (R) and exchange rate (ER). Two variables Y and ER have been observed to be affecting demand for real balances positively, while the observed effect of M2 is negative. Thus, the signs and magnitudes of all three regressors have been observed according to a-priori information without any paradoxical situation.

Keywords: money demand function; stability of demand for money function; co-integration; vector error correction mechanism. (search for similar items in EconPapers)
JEL-codes: C01 C13 E41 (search for similar items in EconPapers)
Date: 2016
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